Can You Claim the QBI Deduction? YES – Here’s How

Introduction

Business owners and self-employed professionals often grapple with high tax burdens, missing out on significant deductions due to complex tax codes and inexperienced advisors. The Qualified Business Income (QBI) deduction, a powerful tax break under Internal Revenue Code (IRC) § 199A, can substantially reduce your taxable income, but many fail to claim it correctly or at all. Are you leveraging the QBI deduction to its fullest potential in 2025?

At Kewal Krishan & Co, our expert tax advisors help clients save an average of $50,000 annually, potentially totaling $1 million over a decade through optimized QBI strategies. This blog explains how to claim the QBI deduction in 2025, enhanced by the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, which made the deduction permanent and expanded phase-in thresholds. With clear examples and compliance steps, we guide sole proprietors, partners, and S-Corp owners to maximize savings. Start unlocking your tax benefits today with insights from Our Tax Planning Services.

Understanding the QBI Deduction in 2025

The QBI deduction, enacted under IRC § 199A, allows non-corporate taxpayers—sole proprietors, partners, S-Corp shareholders, and certain trust beneficiaries—to deduct up to 20% of their qualified business income (QBI) from domestic trades or businesses, plus 20% of qualified REIT dividends and publicly traded partnership (PTP) income. OBBBA ensures its permanence beyond 2025 and introduces key enhancements:

• Expanded Phase-In Thresholds: $75,000 for single filers/$150,000 for joint filers (up from $50,000/$100,000), indexed for inflation post-2026.
• Minimum Deduction: $400 (indexed post-2026) for taxpayers with QBI of at least $1,000 and material participation under IRC § 469.
• SSTB Limitations: Specified Service Trades or Businesses (SSTBs), like law or health, face phase-outs above thresholds, fully eliminated at $275,000 single/$550,000 joint.

The deduction is limited to the lesser of 20% of QBI or 20% of taxable income (minus net capital gains). For high earners, additional limits apply: the greater of 50% of W-2 wages or 25% of wages plus 2.5% of qualified property’s unadjusted basis.

Report on Form 8995 (simplified) or Form 8995-A (detailed), attached to Form 1040. For details, see IRS Publication 535.

Eligibility Criteria

• Business Types: Sole proprietorships, partnerships, S-Corps, or trusts with domestic trade or business income.
• Material Participation: Required for minimum deduction; defined under IRC § 469.
• Exclusions: Employee wages, C-Corp income, and certain investment income are not QBI.

Detailed Example: Claiming the QBI Deduction

Consider Maria, a sole proprietor consultant (SSTB) with $250,000 QBI in 2025, filing jointly with $350,000 total taxable income (no capital gains). Her business has $80,000 in W-2 wages and $100,000 in qualified property basis.

• QBI Calculation: 20% of $250,000 = $50,000.
• Taxable Income Limit: 20% of $350,000 = $70,000. Lesser of $50,000 or $70,000 = $50,000.
• SSTB Phase-Out: Income exceeds $150,000 joint threshold; phase-out range $400,000 ($150,000-$550,000). At $350,000, 50% phased out: $25,000 deduction.
• Wage/Property Limit: 50% wages = $40,000; or 25% wages ($20,000) + 2.5% basis ($2,500) = $22,500. Greater is $40,000, also phased by 50% = $20,000.
• Final Deduction: Lesser of $25,000 (SSTB) or $20,000 (wage limit) = $20,000.
• Tax Savings: At 32% bracket, $6,400 saved.

Minimum Deduction: Since QBI exceeds $1,000 and Maria materially participates, she qualifies for at least $400, but the calculated $20,000 applies.

Alternative Scenario

For a non-SSTB S-Corp owner with $150,000 QBI (below $150,000 threshold) and $60,000 wages: Full 20% deduction ($30,000) applies, saving $9,600 at 32%, as no phase-out or wage limit restricts.

Step-by-Step Guide for Taxpayer Compliance

To claim the QBI deduction in 2025 and ensure IRS compliance, follow these steps:

1. Confirm Eligibility: Verify domestic trade or business and material participation (IRC § 469).
2. Calculate QBI: Subtract cost of goods sold and allowable expenses from gross receipts (IRC § 199A(c)).
3. Gather Data: Collect W-2 wages, unadjusted basis of qualified property, and REIT/PTP income from K-1s.
4. Apply Thresholds: Use $75,000 single/$150,000 joint; compute phase-out for SSTBs or wage/property limits.
5. Complete Forms: Use Form 8995 for simple cases (below thresholds) or Form 8995-A for complex; attach to Form 1040.
6. Check Minimum Deduction: Ensure $400 if QBI ≥ $1,000 and participation met.
7. File Returns: Submit by April 15, 2026, or extend with Form 4868; include K-1s from partnerships/S-Corps.
8. Retain Records: Keep income statements, wage reports, and basis schedules for three years (IRC § 6001).

For businesses with international operations, explore Our Cross-Border Tax Services.

Common Pitfalls to Avoid

• Misclassifying QBI: Exclude non-qualified income like investment returns or foreign income (IRC § 199A(c)).
• SSTB Errors: Misjudge phase-out thresholds, reducing deductions; use OBBBA’s expanded limits.
• Wage/Property Missteps: Underreport wages or basis, limiting deductions for high earners.
• Participation Oversight: Lack material participation documentation, disqualifying minimum deduction.

Why Work with a Tax Expert?

The QBI deduction’s complexity, amplified by OBBBA’s permanence and threshold expansions, demands precise calculations to avoid underclaiming or IRS audits. Generic preparers may misapply SSTB phase-outs or wage limits, costing thousands. Kewal Krishan & Co provides tailored QBI analyses under IRC § 199A, integrating entity structures for maximum benefits. Our expertise ensures compliance and savings, as shown in Our Tax Litigation Services.

Conclusion

The QBI deduction, made permanent by OBBBA, offers significant tax relief for business owners in 2025, with expanded thresholds and a new minimum deduction enhancing accessibility. Whether you’re a sole proprietor, partner, or S-Corp owner, understanding phase-outs, wage limits, and compliance requirements is crucial to claiming your full benefit. Don’t let overlooked opportunities increase your tax burden—act now to optimize your QBI strategy before year-end.

Call to Action

Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to maximize your QBI deduction.

About Our CPA

Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.

Disclaimer

This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.

FAQs

1. What is the QBI deduction?

Up to 20% of qualified business income for pass-through entities under IRC § 199A.

2. How does OBBBA affect QBI?

Makes it permanent, expands phase-in to $75,000/$150,000, adds $400 minimum.

3. Are SSTBs eligible?

Yes, but phase out above thresholds; fully at $275,000/$550,000.

4. What forms are used?

Form 8995 or 8995-A, attached to Form 1040.

5. What’s material participation?

Active involvement in the business, defined under IRC § 469.